Excerpts of the interview with De Rham and Goh
Goh Hui Yang, Senior alternative advisor, and Gregoire De Rham, Head of Alternative investments Asia.
What was the genesis of the thematic funds?
De Rham: The genesis was the recognition relatively early on, that private equity was an industry or an asset class that was appealing. Initially, we only made a few investments. It was more customised, or for certain clients. It was a long period until 2008 when essentially, the point was, given the minimum for private equity, is there a way for more clients to participate in the private equity space?
We [decided on] a fund-of-funds programme, and we wanted them to be multi-vintage. So the Monte Rosa 2008, which was the first such programme, was allocating funds over three vintages. Then we had the flexibility to do secondaries and co-investments, and that investment philosophy or portfolio construction has remained relatively [the same] throughout the years.
Now we are in our sixth-generation [of] Monte Rosa, and we continue to operate with the same kind of approach where you have fund investment as the core, and then secondaries and co-investments. Secondaries will be very cyclical, so there hasn’t been many, whereas we’ve increased our co-investments – from around 10% in the first [Monte Rosa] to around 15% in this [generation].
Given the evolution of the bank and what we had, the question was whether we could marry thematic investing and private markets, and [have] relevant themes for our clients. We felt technology and innovation was definitely one [investment theme], health was next, and the environment would be the third [investment theme].
In the thematic [funds], we’ve used the same template as the Monte Rosa, [with] three vintages. But the key difference here is that the proportion of co-investment is expected to be larger. For the tech fund, it’s up to 35% to 40% and up to 40% for the health fund.
Goh: One of the strategic reasons why we’re going into thematic investing is because the bank wanted to offer a differentiated solution for clients. It started off with technology and innovation, because of the very strong secular trends and developments that we see in the space. And because a lot of companies are staying private for longer, and a lot of value-creation is now happening in the private world, rather than the traditional public markets, how can we find more ways to access the private markets?
[With the] multi-strategy [Monte Rosa], we could see the activity level, the deal flows. That gives us insight, we’re able to size appropriately. [And] because we have been investing in the private space since 1989, there’s a lot of manager selection skills, a lot of relationships that we’ve developed with all these managers, and also our co-investment expertise since 1992, we think that we have got a very efficient product.
Where are the opportunities that Pictet sees?
Goh: We do see innovation and technology happening everywhere, but we see a lot of that being driven by the US. The attractive thing about Asia is the size of the market, and the network effect the minute you start to roll it out.
We have investments in China and India. Generally, we could do a lot more in Asia. Our philosophy is to go where there have been established managers, track records, partners that we have invested with. So [our investments are] naturally skewed towards developed markets.
De Rham: [For the health fund] exposure to Asia would be a touch smaller than in other portfolios.
Goh: The reason is, when it comes to healthcare, a lot of the drug discovery, [developments in] diagnostics and therapeutics are in the US, and you see a fair amount of research in Europe.
When it comes to Asia, we get comfort from track records, and so on a relative scale that tends to be smaller.
A lot of opportunities actually reside in the SME space, especially in drug discovery. A number of these happen out of university research labs, done by smaller companies, smaller research teams, and as they scale up they change hands, even before the big pharma companies come in. It’s almost like an M&A market, so when you have an IPO it’s not a liquidity event per se, it’s a financing round because they need additional capital for [clinical trials].
In terms of manager selection, what are the particular attributes that you look for today, which perhaps were not there before, given the environment in which we operate today?
Goh: Over the last several years, Asia has caught up quite quickly, having benefited from looking at what [managers] in the US and Europe have done. Many of these overseas firms have come up here to set up.
What is important when we’re looking at managers is the track record, and the ability to produce consistent, good returns over cycles. Then we also look at the team. Is this a stable team? Do we have the right people in place? We don’t like one-man shops – the key decision-maker being the only one – that’s not the way to run an institutional business. And alignment of interest is very important. The very successful ones go on to raise bigger funds, they have different products, different strategies. At the end of the day, if they are on the same side as investors, you take comfort that they will do things right, for themselves and for us.
I do think that managers who are serious about institutional capital, they recognise that being institutional is important. When we look at firms, it’s not just having due diligence sessions with the key partners. The next layer matters a lot. Because when it comes to executing a deal it’s a team coming together, it’s not just the head of the firm.
Succession [planning at a firm] is so important. Because making an investment is just the beginning of a journey. This is a long-term investment, and there are external factors completely out of your control. So the experience of the team is very important, and how they support one another. And how does that firm incentivise themselves? Because incentives drive behavior.
At the end of the day, when you’re looking at Asian deals, you need to have local people manage them. People who know the market environment, who knows the network, and where to hire people. You can’t just plug and play. That should not be taken lightly.
De Rham: We are not forced to invest in any region, so that’s the starting point. If you have too many negatives – succession, or lack of proper realisation – that capital will be allocated elsewhere.
For firms that have experienced high turnover, it’s unlikely that we’ve ended up investing because, in the end, we were never able to really qualify the depth, the quality [of the team], the glue among the different team members. It’s part of [our] due diligence to know – who are the key people; we have in there our own analysis of your joiners and leavers, what deals were they involved in.
[With] the co-investments, because we’ve been partnering and selecting managers, the majority of the deal flow that we get comes from those managers. So in a way, there’s already a vetting mechanism on those partners.
What’s driving you towards more co-investments, and do you see yourselves doing more direct investments?
Goh: Direct investments are very, very resource-intensive, and I will use the word opportunistic to describe it. We won’t say no, but it requires time, capabilities, and resources.
In terms of co-investments – we’ve been with our managers for a very long time. We know their style of investment, risk appetite, philosophy, and portfolio management. It gives us comfort to say, yes I want to double down on this deal if there’s capacity. Over time we develop capabilities and we double down when there are suitable opportunities.
©2022, Deal Street Asia